Timothy Noah. The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It. Bloomsbury Press, 2012, pp. 264, $25.00 In August 2012, a Pew Social & Demographic Trends report indicated that the American middle class has fallen on tough times. Among its interesting findings is that more self-described members of the middle [...]
Timothy Noah. The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It. Bloomsbury Press, 2012, pp. 264, $25.00
In August 2012, a Pew Social & Demographic Trends report indicated that the American middle class has fallen on tough times. Among its interesting findings is that more self-described members of the middle class blame Congress than they do President Obama for their perceived difficulty in maintaining their standard of living. Most alarming, and one which likely will have an impact on this year’s elections, is the fact that median net worth took a nosedive during the Great Recession, plunging from $152,950 to $93,150. Furthermore, whether today’s college graduates, many of whom are underemployed and are living back at home with their parents, will achieve the trappings of middle class status anytime soon remains uncertain. One suspects we may be witnessing the emergence of the American equivalent of Japan’s Lost Generation.
Fortunately, however, we might comfort ourselves by knowing that the United States remains a land rich in opportunity much as it was in the past, unique among nations in its lack of a rigid class structure and its social mobility. But we’d be deceiving ourselves. In The Great Divergence, Timothy Noah of The New Republic posits that, since 1979, there has been a “particularly extreme” divergence in income inequality in the United States. Noah synthesizes the work of economists, political scientists, and sociologists to argue that income inequality has increased, and that this is not good for American society. In the book’s final chapter, he advocates specific actions and policies that he believes would help reverse this trend. His suggestions are largely politically progressive proposals, including increasing taxes on the super-rich, bolstering the federal workforce, and breaking up the too-large-to-fail banks. While there are likely some conservative-libertarian policy wonks that would be amenable to his proposal to break up the large banks, few would likely support Noah’s proposal to revive organized labor.
The author takes the title of the work comes from a phrase used by Paul Krugman, an outspoken advocate for Keynesian stimulus, in his 2007 book, The Conscience of a Liberal. Noah defines the Great Divergence as a socio-economic phenomenon as one not primarily involving the poor. Rather, it “is about the difference between how people lived during the half century preceding 1979 and how they lived during the three decades after 1979.” The story he tells, however, is not just about income inequality; it is about diminishing access to the top. According to Noah, over the past several decades, opportunities for upward social mobility have not increased.
Unlike some pundits who rehash talking points, Noah commendably cites ample scholarship to support his claim. In The Great Divergence, the reader learns that the United States now offers its citizens less intergenerational economic mobility than northern and western European nations. (I would venture, however, that the United States still allows for greater social mobility for children of first-generation immigrants than do Scandinavian and other western European countries.) Noah also highlights an intriguing sociological finding which indicates that Americans tend to overestimate the degree to which American society fosters upward socio-economic mobility.
Notable within the pages of The Great Divergence then is the fact that Noah challenges Paul Ryan for an October 2011 speech in which the Wisconsin Congressman contrasted what he perceived to be American social mobility with a rigid European welfare state class structure. Ryan, according to Noah, “had it exactly backward.” In truth, European countries now offer more social mobility than the United States. While Noah penned his study of income inequality prior to Mitt Romney’s choosing Ryan as his running mate, The Great Divergence takes on a more salient political implication in this new found context.
So what caused the Great Divergence? According to Noah, the Great Divergence did not result from prejudice against African-Americans or women. The failure of the American educational system to meet the demand for higher skilled workers is part of the story, as is trade with low-wage nations such as China and the increase of business lobbying in Washington. The decline of organized labor also played a role. Noah also refers to the rise of extremely wealthy (“stinking rich,” in his parlance) as a “separate and distinct phenomenon” that can be thought of as “the Great Divergence, Part 2.” The last several decades have been witness to the emergence of what are, in essence, new social classes within the top 1%, namely the top 0.1% and the top 0.01%. Wall Street, according to Noah, played a substantial role in the emergence of these extremely wealthy individuals. Top income shares are rising faster in the United States than in other developed countries.
Overall, Noah may succeed in persuading the reader in that income inequality not only is on the rise and that it is problematic for society. He is less convincing in his policy proposals to remedy the situation. To be fair, he does rightly acknowledge that many of his proposals, many of which are further to the left than President Obama, are not “politically salable today.” Noah could have bolstered his work, and perhaps the reception to it, had he offered a list of concrete and specific policies that would both reverse income inequality and be palatable to a large slice of the American electorate. The work also suffers from the fact that it is largely a summary of other scholars’ work, much of it very technical, making it less accessible to a general audience that it deserves to be.
In conclusion, one can think of The Great Divergence as a plea to the American public to recognize that income inequality is a problem. It is also to acknowledge that social mobility is no longer operating the way in which it used to. I would contend that the frustration that many Americans feel with Washington in many ways reflects the fact that the system is not producing the same results as it did for people’s parents and grandparents. Income inequality currently is a topic of concern among the country’s economists, political activists, and pundits. Whether it will be a broadly discussed national concern remains to be seen. It would be heartening to see at least one moderator in the upcoming presidential debates ask each of the candidates where they stood on the topic of income inequality.
Jonathan Eric Lewis (c) 2012
Eduardo Porter. The Price of Everything: Finding Method in The Madness of What Things Cost (paperback). Penguin Books, 2011, pp. 296, $16.00 Why do generic drugs cost less than name-brand drugs even though the chemical makeup is, for all intensive purposes, identical? Are wealthy people happier than poor people? Moral objections aside, can one put [...]
Eduardo Porter. The Price of Everything: Finding Method in The Madness of What Things Cost (paperback). Penguin Books, 2011, pp. 296, $16.00
Why do generic drugs cost less than name-brand drugs even though the chemical makeup is, for all intensive purposes, identical? Are wealthy people happier than poor people? Moral objections aside, can one put an accurate price on human life? More philosophically, what is the function of prices in a free market economy? If one were interested in attempting to figure out how best to answer any of these questions, Eduardo Porter’s recent book would be an excellent place to start.
In The Price of Everything, Porter (New York Times) argues that, “every choice we make is shaped by the prices of the options laid out before us—what we assess to be their relative costs—measured up against their benefits.” But there is more to prices than a cut-and-dry economic calculation about how to assess which course of action to take; prices tell us about humanity. “The prices we face as individuals and societies—how they move us, how they change as we follow one path or another—provide a powerful vantage point upon the unfolding of history.”
Historians may find this last statement hyperbolic. Most of Porter’s examples throughout the text are drawn from the twentieth-century. He does convincingly demonstrate that prices do play an important role in how societies are organized. Indeed, I would argue that for post-industrial consumer societies, prices of assets, goods, and services, can tell us a lot about the economic and political health, or lack thereof, of a given polity at any particular point in time. For instance, when only a select few members of a country’s ruling political elite can afford to purchase luxury goods, there is most likely something deeply wrong with that country’s political system.
The author of The Price of Everything makes the case that prices should be understood not just as “attached to things we buy in a store,” but pretty much everywhere. “At every crossroads, prices nudge us to take one course of action or another. In a way,” writes Porter, “this is obvious; every decision amounts to a choice among options to which we assign different values.” He argues that identifying prices allows us to better understand our decisions, be they measured in money, time, or opportunity costs.
The Price of Everything is divided into thematic chapters in which Porter explores the prices of goods, happiness, life, and other aspects of life in which prices matter. In Chapter One, “The Price of Things,” he rightly contends that, “consumers’ interactions with prices are fairly complex.” He identifies the extremely important assumption held by economists, which is that people are rational actors or, in Porter’s words, “people know what they are doing when they open their wallets.” In a balanced approach, he notes that while this is often the case. “But as a general principle, the assumption is misleading in a subtle yet important way.” The difference, according to the author, is this: “market transactions do not necessarily provide people with what they want; they provide people with what they think they want.” Skeptics, on the other hand, might contend that this is a distinction without a difference.
For anyone who has taken a college-level economics course, the rational actor will be a familiar character. But what if the hypothetical rational actor does not always act so rationally? What if this assumption is flawed? Drawing upon behavioral economics, Porter states his view that, “the model of rational humanity is a powerful tool that can help us understand the behavior of men and women in many walks of life. Yet, at the end of the day, belief in the inerrant ability of our choices to communicate our preferences is inconsistent with how we actually behave.” In other words, human nature is complex. In my view, economists, unlike professional historians, make a grand assumption about human rationality, one that any historian of the twentieth-century Europe in particular, could easily refute with ample historical evidence.
For readers interested in the financial crisis of 2008 and its aftermath, the book’s epilogue, entitled “When Prices Fail,” is worth ample consideration. After discussing the housing bubble, Porter discusses speculative bubbles, in general and contends that there are some economists who do not believe that bubbles exist. While Porter does discuss the efficient market hypothesis, he fails to provide as comprehensive an overview of the subject as it merits. The author’s view is that the discipline of economics both is, and should, change in respond to the financial crisis. He contends that the belief in “unbounded rationality” is flawed. Furthermore, he contends that economics needs to embrace a more complex and nuanced understanding of human nature, one in which people do not always pursue what they want, but rather what they think they want, a point he also raised in the book’s first chapter. In my opinion, if economists happened to think a bit more like historians, wherein the world they study is understood to be a messy, complex place that often defies simple explanations, our public policy discussions might not be so polarized between the progressive left and the populist right.
In conclusion, every once and a while, an economics book comes along that is not only intellectually engaging, but also refreshingly devoid of partisanship and quite accessible to a general audience without being overly simplistic. Porter’s well-written study is one of these books. He takes the reader on an intellectual journey into the realm of prices and explains how prices, or what things cost, help explain not only economics, but also aspects of human nature. While it is unlikely that economists, let alone extreme adherents of laissez-faire capitalism, will be willing to forgo with the rational actor assumption anytime soon, it is nevertheless the case that in two decades the economics profession will look very different from what it is today. If you want an engaging and enjoyable non-fiction read this summer, and one that will leave you wanting to learn more about how the discipline of economics might adapt to the post-financial crisis era, The Price of Everything is highly recommended.
Jonathan Eric Lewis (c) 2012
Daniel Gross. Better, Stronger, Faster: The Myth of American Decline . . . and the Rise of a New Economy. Free Press, 2012, pp. 260, $26.00 Is the United States is economic decline? There certainly have been enough commentators and pundits who have made this point in one form or another. Even a cursory glance [...]
Daniel Gross. Better, Stronger, Faster: The Myth of American Decline . . . and the Rise of a New Economy. Free Press, 2012, pp. 260, $26.00
Is the United States is economic decline? There certainly have been enough commentators and pundits who have made this point in one form or another. Even a cursory glance at the news would lead most observers to conclude that this country faces some entrenched, systemic, and nearly unsolvable economic problems. In June 2012 alone, news outlets have reported that the trade deficit is at its highest in the past three years, employment for 16-to-19 year olds is at the lowest level since the Second World War, and that foreclosures are on the rise. All of this data hardly inspires optimism about America’s ability to recover from the Great Recession. In addition, there is a growing worldwide perception that China is a stronger economic power than the United States.
Despite this doom and gloom, however, one economics writer has chosen to see past the constant pessimism that seems to pervade the nation’s policy discourse. In Better, Stronger, Faster, Daniel Gross (Yahoo! Finance) seeks to challenge what he perceives as the conventional wisdom that the United States is in a state of economic decline. According to Gross, many on the political left and right, as well as those in the center, have succumbed to economic declinism. While Keynesians consider President Obama’s response to the economic crisis as too passive, the Tea Party sees the current occupant as the White House as a socialist. All the while, academics published works detailing how American glory days are over.
Gross refuses to accept the narrative of American decline and challenges it at every turn. Indeed, the vast majority of the information presented in Bigger, Stronger, Faster is intended to build the case against declinism. The title of the author’s most recent work is an allusion to The Six Million Dollar Man, the 1970s television show in which doctors rebuilt the character Steve Austin, an injured astronaut, as the world’s first bionic man. In the show’s opening credits, it was stated that the doctors could rebuild the wounded Austin, played by Lee Majors as better, stronger, faster.
“And like Steve Austin,” writes Gross, “the U.S. economy can bounce back from its catastrophic wipeout. In fact, the process has already started.” This is the central thesis of Gross’s work, and one which he goes to great lengths to support. He marshals a vast array of evidence in the form of both statistics and anecdotal observations. Significantly, in his point of view, when trying to understand why things may not be as bad as they first appear, American Exceptionalism matters. “The reality-based case for optimism rests in large measure on an understanding of America’s core competencies and competitive advantages; attitudes, habits, and capabilities that, even in this age of globalization remain unique.” In the American context, adaptability is key.
Gross delineates three internal factors that, in his estimation, lend credence to his argument against declinism: policy decisions, including the bailouts and stimulus, which, in the author’s estimation, succeeded in preventing a second Great Depression and laying the groundwork for a recovery; the speed by which the private sector responded to the crisis by restructuring; and a move toward efficiency. That said, Gross considers that external forces matter even more than internal ones. “And while these efforts [government policy decisions, business restructuring, and efficiency] were vital and useful, the main forces that have helped propel growth came from external sources, not internal ones.” The United States, Gross reminds us, ranks first in foreign direct investment (FDI) and is the world’s top exporter, including in service exports.
In the book’s conclusion, Gross does rightfully concede that the United States does indeed face some daunting challenges. “There’s no question,” he writes, “the United States has a very long way to go to make up for the lost ground in the economy at large, in housing, and in jobs.” But he also contends that the United States has experienced “a huge comeback.” There is nothing necessarily inaccurate about Gross’s thesis that we are on our way to an economic recovery.
Better, Stronger, Faster does provide ample evidence against the declinist faith. But the more salient question might be what the American economy would look like today but for the Great Recession? Coming back from the brink of disaster is one thing; having avoided the debacle in the first place is a different thing entirely.
In my estimation, Gross, in his zeal to prove the declinists wrong, somewhat overstates his case. Although he does acknowledge the debt and the deficit, he gives them short shrift. In addition, nary a word is said about the plight of the Millennials, many of who are in debt, are living back at home with their parents after graduation from college, and have bleak job prospects outside of unpaid internships. The American economy may have recovered better, stronger, and faster, but this means very little to those saddled with tens, if not hundreds, of thousands of dollars in non-dischargeable student loans.
In conclusion, Better, Stronger, Faster is a largely accessible and an engaging study that seeks to combat the pervasive narrative that the United States is in economic decline. Whether one agrees with the author’s thesis is perhaps situational, in the sense that a graduate-educated, gainfully employed technology professional in Silicon Valley would agree that things are getting better, while an underemployed college graduate in the Sun Belt saddled with student debt would think Gross highly mistaken. Whatever the case may be, the debate about whether or not America is in economic decline likely will continue to rage throughout the next year.
Jonathan Eric Lewis (c) 2012
Where You Live Matters More Than You Think
Enrico Moretti. The New Geography of Jobs. Houghton Mifflin Harcourt, 2012, pp. 294, $28.00 If you worked in a bookstore, but had dreams of possibly going to law school and eventually buying a home close to the city where you resided, where would you rather live: Nashville, Tennessee, or the Boston suburbs? Each individual, based [...]
Enrico Moretti. The New Geography of Jobs. Houghton Mifflin Harcourt, 2012, pp. 294, $28.00
If you worked in a bookstore, but had dreams of possibly going to law school and eventually buying a home close to the city where you resided, where would you rather live: Nashville, Tennessee, or the Boston suburbs? Each individual, based on his own personal preferences, would have to weigh the choices carefully. If one absolutely could not live without access to country music, Nashville would be the logical choice. Similarly, a Boston Bruins fan might prefer to live in southern New Hampshire than in a small town in Tennessee. But if one were more concerned solely with one’s long-term economic prospects, what city would be a better choice? Indeed, is there a clearly better choice? And what data would one employ to make that decision?
In The New Geography of Jobs, Enrico Moretti (University of California, Berkeley) contends that, when it comes to prosperity, where you live matters more than you might think. “America’s new economic map,” writes Moretti, “shows growing differences, not just between people but between communities.” He calls this divide the Great Divergence, and argues that it has its roots in the 1980s when the character of different American cities began to be defined by the educational levels of their residents. Indeed, he posits that, at the same time that American communities are desegregating along racial lines, they are becoming more segregated in terms of education and income. Moretti’s argument is that, “the growing economic divide between American communities is not an accident but the inevitable result of deep-seated economic forces.” Think of the differences between Boston and Silicon Valley, on the one hand, and Detroit and Bakersfield, California, on the other.
If one has been paying even scant attention to American demographic trends, one would certainly realize that, over the past ten to fifteen years, cities like San Jose, Seattle, and Austin have become attractive destinations for graduate-educated professionals. Oklahoma City, Cleveland, and Flint, Michigan, are not typical destinations for the same demographic. What explains the difference? In a word: innovation. According to the author, cities that have become centers of innovation, broadly construed, have become magnets for educated professionals whose presence in a city has a positive multiplier effect on those in the service industries around them. Indeed, Moretti posits that, “the best way for a city or state to generate jobs for less skilled workers is to attract high-tech companies that hire highly skilled ones.” In other words, innovators are the new engines of economic growth. Human capital is what matters.
In the book’s fourth chapter, Moretti first notes that there is no obvious explanation in terms of natural advantages to explain why innovative companies are located in particular locations. “As it turns out, in the world of innovation, productivity and creativity can outweigh labor and real estate costs.” Three forces, collectively known as the forces of agglomeration, are responsible for the aforementioned Great Divergence, the process that is separating American communities from each other in terms of education and income.
These three forces are: thick labor markets, specialized service providers, and, in the author’s opinion, most important, knowledge spillovers. Put simply, innovation hubs such as the Bay Area remain so because those with special skills move and remain there, because of the close proximity to venture capitalists, and because skilled innovators in a city enhance innovation and prosperity. Innovation, it turns out, is actually a fairly local phenomenon. “In the end, geographical proximity to venture capitalists still matters. Skype and cell phones have not changed this simple fact. This is one of the reasons that the world of high tech is and will remain geographically concentrated.” Where you live and work and, more importantly, whom you interact with, matters deeply for both a city’s and an individual worker’s economic prospects.
Earlier in the book, Moretti directly challenges Friedman’s world-is-flat theory, by noting that the opposite of a flattening world is occurring. “In innovation, a company’s success depends on more than just the quality of its workers—it also depends on the entire ecosystem that surrounds it. This is important, because it makes it harder to delocalize innovation than traditional manufacturing.” Indeed, one of the highlights of Moretti’s work is his willingness to challenge shibboleths on both the left and the right. While he calls for more government financial support for scientific academic research, and private R&D through tax credits, he also rightly calls out those who falsely claim that greedy bankers killed blue-collar jobs by pointing to the real, structural culprits responsible: globalization and technological progress.
If Moretti’s thesis about the divergence of American communities is valid, then what can, or should, be done to remedy the situation? Specifically, he notes two different policy approaches that will help the United States continue to lead in innovation and economic prosperity: drastically reform the immigration system to allow for more college- and graduate-educated workers to come to the United States and, alternatively, increasing human capital at home through spending programs that would revamp secondary education and greatly increase higher education.
Overall, The New Geography of Jobs is a well-written and engaging work of scholarship. Moretti does an excellent job at making complex economic concepts accessible. The work does, however, contain a strong bias toward Silicon Valley and northern California. Perhaps this is due to, at least in part, the author’s position in the Economics Department at Berkeley. As the debacle surrounding the Facebook IPO demonstrates, innovation hubs are not without potential pitfalls. I do not mean to suggest that Silicon Valley will be displaced anytime soon. Rather, it suggests that one should always be skeptical of any overarching thesis regarding American economic trends. Moretti is correct in pointing out that long-term economic trends matter more than the short-term policy thinking that dominate contemporary policy discussions would have us believe. “Our ethos of immediate reward and our almost structural inability to take responsibility for long-term problems is leading us to underinvest in our future.” Sobering thoughts indeed.
In conclusion, The New Geography of Jobs is filled with interesting data and is well worth consideration. Intuitively, one feels as if Moretti is largely correct in his assessment about the diverging fortunes of American cities. A larger question, and one beyond the scope of his work, is whether the people in those cities with large salaries are truly happy and doing work that they love, or whether they are there because of nearly insurmountable student debt. Whatever the case may be, it is very likely the case that Boston, New York, and Seattle won’t be displaced anytime soon.
Jonathan Eric Lewis (c) 2012
Finance as a Positive Force
Robert J. Schiller. Finance and the Good Society. Princeton University Press, 2012, pp. 288, $24.95 The financial sector has gotten a bad rap of late. Indeed, as referenced in this recent work, the emergence of both the Tea Party, which argued against the massive taxpayer bailouts of large financial institutions, and the Occupy Wall Street [...]
Robert J. Schiller. Finance and the Good Society. Princeton University Press, 2012, pp. 288, $24.95
The financial sector has gotten a bad rap of late. Indeed, as referenced in this recent work, the emergence of both the Tea Party, which argued against the massive taxpayer bailouts of large financial institutions, and the Occupy Wall Street movement, which condemned the capitalist system, signified that large segments of the American populace are not happy with Wall Street and investment professionals. As the economy has shown signs of improvement, the public anger has seemed to lessen. That said, it is still too soon to tell whether the news about J.P. Morgan’s losses will have the effect of rejuvenating the public’s distrust of Wall Street and of finance, in general.
In Finance and the Good Society, Robert J. Schiller (Yale University) argues that the world of finance, in its best incarnation, has the potential to improve peoples’ lives. “What I want most for my students . . . to know is that finance truly has the potential to offer hope for a more fair and just world, and that their energy and intelligence are needed to help serve this goal.” Schiller is cognizant of the problems in our current financial system. The solution to these problems, however, is not to castigate financial capitalism as a system for producing wealth, or to denigrate the profession of finance in which many Americans make their living.
The financial crisis, contends the author, cannot easily be blamed “on a sudden outbreak of malevolence” on the part of those employed in the financial sector. The causes of the crisis can be traced to “fundamental structural shortcomings in our financial institutions,” rather than to greed or dishonesty. Schiller further posits that the post-crisis legislation and regulations have not solved our financial system’s real problems. That said, he does not think the answer to our current woes is to restrain finance.
In fact, he believes the opposite to be true. “It seems a paradox that the very financial system that is the facilitator of some of our greatest achievements can also implode and create such a disaster. Yet the best way for society to proceed is not to restrain financial innovation but instead to release it.” In order to reduce the likelihood of future financial crises, contends Schiller, we need “better financial instruments, not less activity in finance.” Indeed, as he rightly acknowledges, there does not appear to be a realistic alternative to financial capitalism.
An expanded and further democratized financial system will allow more people to benefit from finance’s ability to improve people’s lives. Indeed, Schiller, as the title of the book suggests, believes that finance can help build a good society. Finance, he argues, is “the science of goal architecture—of the structuring of the economic arrangements necessary to achieve a set of goals and of the stewardship of the assets needed for that achievement.”
Finance, which is not a goal in itself, can help allow for the creation of the good society, a philosophical notion regarding an aspiration goal for an egalitarian society in which all people are valued. The implication is that finance should not be synonymous with greed. Rather, it is a mechanism which, when working correctly, allows for prosperity. As examples, Schiller cites the funding of a new medical research project and the construction of a new subway system as two goals that finance can help achieve.
Finance and the Good Society is divided into two distinct parts. The first, “Roles and Responsibilities,” details the various careers in finance. He devotes chapters to, among other careers, chief executive officers, lawyers and financial advisers, and regulators. The book’s second section, “Finance and Its Discontents,” borrows its title from Sigmund Freud’s 1930 work, Civilization and its Discontents, in which the famed Austrian-Jewish psychologist noted that many seemed to be discontented with civilization as it existed, but that ultimately it was not so easily improved. Schiller contends that we cannot go back to a simpler time; we can only move forward.
While there is a plethora of interesting material in Finance and the Good Society, there remains something uneven about the work as a whole. Perhaps this is due to the fact that the book is divided into thirty distinct chapters, some of which are only several pages long. It could also be due to the (overly?) ambitious nature of the book, in which Schiller interweaves finance with history and philosophy. For instance, in his discussion of speculative bubbles, he posits China’s Great Leap Forward to have been an “investment bubble that took place in the absence of financial markets” and that “World War I was in a sense a bubble.” These arguments, while thought provoking, are ultimately unconvincing.
In conclusion, Finance and the Good Society is a further edition to the vastly growing corpus of scholarly literature on the financial crisis and the role of finance in society. In many ways, this could prove to be an excellent introduction to the subject of finance for liberal arts-oriented undergraduates. This is particularly true given the fact that many current undergraduates may be skeptical of pursuing careers in finance.
Jon Lewis (c) 2012